Puerto Rico's Bond Prices Are Falling Sharply, Foreshadowing U.S. Problems

By:  Bob Adelmann
10/30/2013
       
Puerto Rico's Bond Prices Are Falling Sharply, Foreshadowing U.S. Problems

The economic problems facing Puerto Rico are the same problems facing the United States, and they are caused by the same things.

Despite the fact that Puerto Rican (PR) municipal bonds are triple-tax-exempt (no federal, state, or local income taxes apply on their interest), their interest rates have skyrocketed since the Detroit bankruptcy first disrupted the complacency among municipal bond investors in July. High quality municipal bonds are paying little more than 1 percent annually, but PR bonds, even though they remain investment grade (barely), have spiked to paying between 8 and 10 percent, with some predicting that even higher rates will be necessary in order to attract new investors.  

Comparisons to Detroit are tempting, but a careful look at the headwinds facing Puerto Rico makes Detroit’s problems seem almost not worth mentioning. Detroit’s bankruptcy filing in July was for $18 billion. Puerto Rico’s debt is nearly four times larger.

A partial listing of those headwinds include:

• Moody’s downgrade of PR debt on October 3 to just above junk, with its outlook changed from stable to negative;

• The recent settlement by UBS bank’s Puerto Rican branch with the Securities and Exchange Commission over hiding the country’s faltering financial condition and artificially supporting bond prices;

• The necessity by Puerto Rico treasury officials to borrow in the private market because the bond market is essentially closed to them;

• The U.S.-enforced minimum wage in Puerto Rico, which makes it too expensive for business owners to hire workers, impacting the island’s already high unemployment rate — a rate that is nearly twice that in the United States;

• National debt that is greater than any American state, except California (population of 38 million) and New York (population of 20 million) — Puerto Rico has a population of just 3.6 million;

Click here to read the full list of issues. 

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